Friday, August 10, 2007

Subprime mortgage loans are those granted to borrowers with less-than-perfect credit. Lenders typically charge higher interest rates to these subprime borrowers to compensate for potential losses.

Last week the first major subprime lender collapsed under the pressure from loan defaults. American Home Mortgage Investment Corp. sold nearly $60 billion dollars in loans to borrowers in 2006. They were forced to declare bankruptcy when they could no longer find Wall Street firms willing to invest in securities to back the loans they were making.

The failure of AMHMIC caused subprime concerns to spread to Alt-A mortgages, which are mortgage loans for people with good credit, but who do not want to nor have the means to verify income with tax forms and pay stubs. Alt-A loans made up 13% of all mortgage loans last year according to Inside Mortgage Finance.

When discussing the current mortgage loan crisis before Congress, Federal Reserve Chairman Ben Bernanke said on July 18, 2007 that "rising delinquencies and foreclosures are creating personal, economic and social distress for many homeowners and communities -- problems that likely will get worse before they get better."

"David Olson, president of Wholesale Access Mortgage Research & Consulting Inc. in Columbia, Maryland, is blunt about his current outlook. He says a third of the U.S. home-loan industry will disappear." [2]

The economic impact of this crisis is obvious. Lenders are running short on cash with which to make future loans and are being forced to borrow money from European banks. Hedge funds investing in mortgage securities are being frozen because managers can't determine their values because of lack of buyers. As of this writing the Dow Jones Industrial Average has fallen nearly 900 points from its high of 14000 based on mortgage default fears. The National Association of Realtors says U.S. housing prices will fall for the first time since the Great Depression of the 1930's.

Just who are these borrowers that are defaulting on their mortgage loans at a nearly a 50% rate? Leonardo Simpser of the Hispanic National Mortgage Association (NHMA) says that Hispanic first-time buyers constitute the fastest-growing segment of the subprime mortgage market. He also says that many Latinos, especially recent immigrants, have low FICO credit scores or no scores at all and are less creditworthy than they are in reality.

HNMA is the creator of the Hispanic Automated Underwriting System (HAUS) which claims to allow lenders to "eliminate the need for time-consuming manual underwriting of such applicants, and allows lenders to underwrite borrowers with no Social Security numbers and multiple income sources."

Congress needs to act. We need a full congressional investigation into determining just how rampant the illegal immigration problem is in regards to these mortgage defaults. Much like the savings-and-loan scandals of the 80's we need to know which banks are catering to illegal immigrants in violation of U.S. law and making these extremely high risk loans putting the economic prosperity of this country in great peril.